Four underwhelming mergers that might give Microsoft-Yahoo pause

We're in the midst of the "greatest-ever merger wave," according to an article published last month by The Economist, a publication that is supposed to know about these things.

Microsoft's US$44.6 billion cash-and-stock offer for Yahoo -- which could lead to a record deal from a price perspective in the high-tech sector -- only adds more fuel to the merger-hype fire.

But if the acquisition that Microsoft proposed last week does go through, will it work out? The track record on such mega-deals isn't always good, nor are mergers and acquisitions in general a panacea for the participants in most cases.

Even supporters of M&A activities acknowledge that fact. For instance, in a report issued last July, The Boston Consulting Group, while generally championing mergers and acquisitions, said that nearly 60 per cent of the M&A deals it tracked from 1992 to 2006 caused the acquiring company's stock price to fall. And it noted that on average, "larger deals have a higher probability of failing."

Things haven't necessarily changed since 2002, when Alfred Rappaport, then a professor emeritus at Northwestern University's J.L. Kellogg Graduate School of Management, wrote in a column for The Wall Street Journal that buyers typically overpay for the companies they target, due partly to being overly optimistic about cost-cutting opportunities and their superior management capabilities.

Rappaport said that two-thirds of acquiring companies see their stock prices immediately fall upon news of a deal, a drop that "usually corresponds" to performance of such stocks over the next year. The "sobering facts" about mergers and acquisitions, he wrote, are that "a majority of them don't work."

So perhaps it's an omen that the price of Microsoft's stock has fallen about 10 per cent from its closing price last Thursday, prior to the announcement of the Yahoo offer on Friday morning. It's fair to note that Microsoft's stock already had been on a downward track before the announcement, in keeping with the overall market decline. But here is a cautionary look at the four biggest deals of the past decade -- all larger than the proposed Microsoft-Yahoo one, and all with less-than-stellar outcomes.

Vodafone Group buys Mannesmann (completed in 2000)

Price: US$183 billion in stock

Why: Vodafone, the UK's largest mobile network operator, felt threatened by Mannesmann's purchase of Orange, then the third-largest mobile carrier in the British Isles. In retaliation, Vodafone made an offer for Mannesmann, which was Germany's second-largest telephone company after Deutsche Telekom.

Hostile or friendly: Hostile, partly because of the German public's concerns about foreign control of companies. But that didn't stop Mannesmann's board from later agreeing to an increased offer from Vodafone.

Post-merger: Vodafone recorded aggregate losses amounting to US$41 billion for its 2006 fiscal year, most of which it blamed on the aftermath of the Mannesmann acquisition. It lost another US$10 billion in the fiscal year that ended last March. And the company's stock price remains 40 per cent below its peak level before the acquisition. On the other hand, buying Mannesmann helped Vodafone become the world's largest mobile carrier at the time -- a position it has maintained through numerous acquisitions and joint ventures around the globe. Vodafone currently has about 200 million customers in 25 countries.

America Online buys Time Warner (completed in 2001)

Price: US$164.7 billion in stock

Why: To combine the best of new and old media, bringing together a wide variety of content from Time Warner and AOL's user base of 20 million subscribers.

Hostile or friendly: Friendly, although the bursting of the dot-com bubble soon after the deal was announced took AOL's share price along with it -- causing friction over who was really taking over who.

Post-merger: You thought Vodafone's US$41 billion loss was bad? AOL Time Warner lost US$100 billion in 2002, including a US$99 billion write-off stemming from AOL's decimated stock price. The company has since renamed itself Time Warner Inc., but its stock price is still more than 80 per cent below the merger-era peak. AOL is now a majority-owned subsidiary of Time Warner, and its Internet access business is a shadow of its former self, with only about 10 million subscribers now -- putting it in third place overall among Internet providers in the US.

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